9/15/2013

In my gut, I feel there must be a way to reconcile the mainstream New Keynesian model with the mechanistically accurate way many heterodox economists (mostly thinking of Post-Keynesians here) describe the functioning of the monetary system. There will likely be some irreconcilable gaps, particularly when we start to move away from the monetary system, but it may be possible in a rough sense. I feel this way because most of the time, the two sides can’t even agree on their disagreements (okay, at least the participants on the internet). To me, that’s a sign there’s a serious element of cross-talk whereby each side is speaking a different language.

There have been extensive debates on the econoblogosphere over
the past couple of years regarding the degree to which banks are “special” due
to the manner in which they create money and credit. Steve Randy Waldman, as is
often the case, provides a helpful synthesis, discussion, and collection of links
regarding thesedebates.

As almost always in these sorts of mainstream versus
heterodox intellectual scuffles, the extent to which there is disagreement due
to differences in framing and semantics, as opposed to the underlying
fundamental issues, is unclear. Additionally, there are many elements to this
debate, and both sides have valid things to say (disclaimer: I am admittedly
amalgamating the debaters into two broad camps for simplicity, but further
delineations can be made). However, I do not think that for each and every
element of the debate, each side offers an equally valid viewpoint. In any
case, my intention here is not to provide a comprehensive analysis of these
matters. I recommend reading JKH’s commentary at thefollowing linksfor more
detailed thoughts along these lines.

What I’d like to focus on is the mainstream economist’s
tendency to characterize banks as ‘financial intermediaries between borrowers
and lenders’ with respect to their lending function. Many participants (but not all!) in this
debate that lean towards the economic heterodoxy have a problem with this
characterization, given their usually more nuanced understanding of banking
operations and mechanics. I understand and sympathize with this perspective,
but I ultimately aim to argue what’s stated in the title of this blog post. I
think someone with an endogenous view of money can be okay with the mainstream characterization,
even if some mainstream economists who use it don’t have a very robust
understanding of how banking works operationally.* To be clear up front, none
of this is to say that banks are not important to the economy or should not be
modeled.